TRUE/FALSE TEST QUESTIONS T F 1. The maximum loss on a call purchase is the prem
ID: 2696670 • Letter: T
Question
TRUE/FALSE TEST QUESTIONS
T F 1. The maximum loss on a call purchase is the premium on the call.
T F 2. Buying a put is the mirror image of buying a call.
T F 3. Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.
T F 4. To maximize profits on a call purchase, one should hold the position for as short a time as possible.
T F 5. Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration.
T F 6. A covered call writer will make a lower profit if the option is exercised early.
T F 7. The holder of a protective put has the equivalent of an insurance policy on the stock.
T F 8. A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market.
T F 9. An investor can construct a synthetic put by buying a call and selling short a stock.
T F 10. An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.
T F 11. The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.
T F 12. Given two bearish investors, the more risk averse investor would tend to select a put with a higher exercise price.
T F 13. Both call and put writers have the potential for unlimited losses.
T F 14. In the context of insurance, protective put buyers who choose lower exercise prices are essentially using higher deductibles.
T F 15. As long as puts are available for trading, there is little justification for constructing synthetic puts.
T F 16. Covered calls are a less costly way to protect stocks because you receive money for the sale of the call, whereas you must pay money for a protective put.
T F 17. To reach breakeven on a call purchase held to expiration, the stock price must exceed the exercise price by at least the amount of the call premium.
T F 18. A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.
T F 19. Covered call writing should be considered a strategy to enhance the return on a stock.
T F 20. A protective put provides the same type of profit diagram as a long call.
T F 21. A covered call with a higher exercise price has a higher breakeven.
T F 22. The profit from a covered call is the profit from a long stock plus the profit from a long call.
T F 23. A synthetic put is always less expensive than a synthetic call.
T F 24. Any strategy consisting of only long options will lose money if the stock price stays the same.
T F 25. The breakeven for a protective put is the same as that for a covered call.
T F 26. The following is the profit equation for a put option: ? = NP[Max(0, X
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